Banker Sentenced to 30 Years in Federal Prison

The former owner of one of the largest privately held U.S. mortgage lending companies and Colonial Bank was sentenced to 30 years in federal prison and ordered to forfeit $38.5 million for his part in a massive $2.9 billion fraud scheme that drove his bank and mortgage company into failure.

Lee B. Farkas, 58, the former chairman of Taylor, Bean & Whitaker was convicted for being the master-mind in a criminal conspiracy that ran for at least seven years under his direction. The former bank chairman was sentenced after being convicted on 14 felony counts by a jury after a 10-day federal trial in Virginia. Farkas was found guilty on six counts of bank fraud, four counts of wire fraud, three counts of securities fraud and a single count of conspiracy under U.S. District Judge Leonie Brinkema.

Greed and risky behavior led to Farkas’ down fall. Between 2007 and August 2009 as the U.S. faced the worst financial crisis since the Great Depression – largely caused by fraudulent mortgages – Farkas ramped up a scheme to rip off banks through the sale of fake mortgage assets and by double and triple selling mortgage loans.

Farkas and six co-conspirators engaged in a scheme to misappropriate more than $1.4 billion from Colonial Bank’s Mortgage Warehouse Lending Division in Orlando, Florida and another $1.5 billion from Ocala Funding, a mortgage lending facility controlled by the mortgage firm. All of the six employees have pleaded guilty as conspirators to the bank fraud and thefts from bank checking accounts.

The money was stolen to cover mortgages that had gone into default and to cover TBW’s operating expenses. The scheme and reckless mortgage lending practices contributed to Colonial Bank and Taylor, Bean & Whitaker’s failures.

“Mr. Farkas orchestrated a fraud of staggering proportions, the effects of which are still being felt by the thousands of former employees of TBW and Colonial Bank, and shareholders of Colonial BancGroup,” said Assistant Attorney General Lanny Breuer. “From a $28 million private jet and vacation homes in Maine and Key West, to expensive antique cars and restaurants, Mr. Farkas plundered his company and Colonial Bank to prop up his failing business and to feed his ostentatious lifestyle.”

“By causing the failure of Colonial Bank and TBW, two significant players in the mortgage market, Farkas’s scheme affected those at the heart of the financial crisis, including major financial institutions, government agencies (Freddie Mac and Fannie Mae), taxpayers, and employees and investors,” said MacBride.

According to court documents, the scheme began in 2002 when the group ran overdrafts in TBW bank accounts at Colonial Bank in order to cover-up cash shortfalls. The team of colleagues transferred money between accounts at Colonial Bank to hide the overdrafts, which grew to over $100 million.

The group covered up the overdrafts and operating losses by causing Colonial Bank to purchase from TBW more than $1.5 billion of worthless mortgage loan assets, including loans that TBW had already sold to other investors and fake pools of loans formed into mortgage-backed securities.

The ex-banking executive reported these assets on its books at face value when in fact the mortgage loan assets were worthless. By August 2009, approximately $500 million in fake pools of loans remained on Colonial Bank’s books.

Catherine Kissick, a former senior vice president of Colonial Bank and head of the mortgage warehouse lending division was sentenced to eight years in prison. Desiree Brown, the ex-treasurer of TBW, was sentenced to six years in federal prison. Paul Allen, the former chief executive officer of TBW, was sentenced to 40 months in prison.

Ray Bowman, the former president of TBW, was sentenced to 30 months in prison. Teresa Kelly, a former operations supervisor for Colonial Bank’s MWLD, and Sean Ragland, a former senior financial analyst at TBW, were each sentenced to three months.